Incentive Industry Primer

Although most marketers of consumer products focus on the retail market, many with desirable products have discovered the $32 billion-plus corporate market for incentives, gifts and promotional products. While there are important distinctions between incentives and promotional products, both markets are of interest to any company whose products are used by consumers. This article is designed to help companies explore and profit from the corporate market for incentives and promotional products and to teach managers and employees about this important, often overlooked marketplace.

Key Definitions Scope of the Market Today's Buyer Resources Required What It Takes to Succeed Sales and Marketing Taxes and Legal Issues Potential Competitors

Types of Suppliers Directories of Suppliers Associations Conferences and Trade Shows Seminars Research Books Publications

Key Definitions

• Incentive: Any special offer used to spur an action by consumers, middlemen, salespeople or employees; can include cash, merchandise, travel or services. Merchandise commonly used as incentives includes high- or low-ticket goods desired by consumers, ranging from home entertainment systems to windbreakers. Since the purpose of the incentive is to spur people to action, it must be something that people desire; it usually has no imprinting or engraving. Prices range from as little as $5 in consumer offers to thousands of dollars in programs for salespeople, middlemen or employees.
• Premium: Any type of merchandise used as an incentive; in most cases, incentives and premiums are used as part of a broad sales, marketing or compensation program that has specific objectives and a definite beginning and an end. 
• Promotional products (also known as ad specialties): In contrast to incentives and premiums, promotional products are given away with little expectation of action on the part of the recipient; they almost always bear a visible corporate imprint used to convey the giver's identity. The most effective promotional products don't motivate, but serve some sort of purpose that maximizes their long-term visibility and marketing impact. Examples: apparel, mouse pads, calculators, clocks and watches, and low-cost electronic items. Many companies use promotional products on a year-round basis as part of consumer or employee programs. 
• Recognition awards: Gifts or services given to employees or customers as a thank-you for performance not related to an incentive program; they can range from low-priced commemorative items or jewelry to heirloom wall clocks.

 

Scope of the Market

The 2007 Incentive Federation Study - A Study of the Incentive Merchandise and Travel Marketplace, a comprehensive research study of the incentive field, reported that $46.1 billion was spent by U.S. business on incentive travel and merchandise in 2006 to motivate consumers, employees, dealers and salespeople (see "Research"). Businesses use incentives to:

• Motivate employees to work toward a common goal; 
• Recognize performance; 
• Get people to make a purchase they might not otherwise make; 
• Reinforce a marketing message. Noncash awards, such as merchandise, are used to avoid the pricing or compensation issues raised by the use of cash. Merchandise is also used by companies and organizations in consumer promotions, such as gift-with-purchase offers, contests/sweepstakes, self-liquidators and continuity programs.
  

A second phase of this study was designed to determine users' objectives, practices, costs and results across all levels of American business. The results, published in the August 1999 issues of both Incentive and Potentials magazines, reveal that incentive programs are both highly effective and cost-efficient. Following are some key highlights:
 

• All three categories sales programs, consumer/user programs and dealer programs, reported over 80 percent success rate in terms of achieving their established goals with their incentive programs. 
• 82 percent of the respondents use merchandise and/or incentive travel as sales incentives. 
• 66 percent of respondents in the consumer/user promotions category use merchandise and/or travel incentives. 
• 61 percent of respondents in the nonsales recognition/motivation category use merchandise and/or travel incentives to motivate. 
• 48 percent report using merchandise or travel in dealer incentive programs. 
• Cost (65 percent) and profitability (62 percent) are the top two key decision factors when designing motivation programs. 
• Over 65 percent of respondents strongly agree that both "travel and merchandise awards are remembered longer than cash payments" and "you can build a more exciting and memorable program around travel and merchandise than you can with cash."

 

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Today's Buyer

When it comes to incentives and promotional products, today's corporate buyer is not a purchasing manager, but a midlevel manager in sales, marketing, operations, customer service, production, training, human resources or product management who has the responsibility of motivating and recognizing key people. Because of downsizing, the typical buyer has many duties that have little to do with incentives and promotional products. In addition, many of these companies are only occasional buyers of incentives and promotional items, and it's impossible to predict whether their orders will be large or small.

To make things more confusing, the market is filled with several types of middlemen with different levels of involvement. These include incentive representatives, promotional products distributors, incentive companies, retailers, meetings services companies, and promotion and advertising agencies (see "Types of Suppliers"). Many of these companies have only sporadic involvement with various aspects of the corporate market. Nevertheless, corporate customers still require current product and pricing information, color spec sheets suitable for reproduction, access to samples and other promotional support. (Ethical buyers pay for samples, often with a special credit when the business comes in.) Most significantly, buyers demand the same high level of customer service that a major retail account requires without necessarily offering the opportunity for a long-term relationship.

Resources Required

Because there are fewer than 20,000 decision makers and influencers involved with large orders for incentives and promotional products, they can be sold and marketed to relatively inexpensively (see "Sales and Marketing"). However, while the benefits of advertising, trade shows and direct mail can be enjoyed for a relatively small budget, it requires a qualified sales manager with adequate support to capitalize on the opportunity.

What It Takes to Succeed

Not just any company can make it in the incentive or promotional products business. Success starts with having a product or service that people want. After all, how many people can you motivate, recognize or communicate with using something like a pipe, a ball bearing or a toilet bowl plunger? Suppliers that succeed usually sell something that (a) is desired by at least one identifiable demographic group and (b) has demonstrated that success at retail. Most companies, in fact, get into the corporate market simply because some organization calls and asks to buy a large order for a business purpose. Despite the potential, success doesn't come easily in incentives and promotional products. The highly fragmented distribution of corporate business has frustrated many major suppliers, some of which have abandoned the marketplace simply because they initially threw more resources than justified at an elusive target. Here are the issues that your company has to address before expanding its effort in the corporate market:
 

• Who wants your product? What demographic group or audience buys and enjoys the product or service your company sells? Is it a large market? Difficult to reach? Answers to these questions will help define your market potential. 
• Product positioning. Where do your products fall in the corporate marketplace? Would they be used as gifts, recognition awards, promotional products or items for sale in company stores? If useful as incentives, would they work as prizes in sweepstakes or as high-end awards for salespeople, dealers or employees? Are they, perhaps, better suited for lower-priced awards, midlevel awards or even lower-priced items used in consumer promotions? Many companies have products that fall into more than one of these categories. 
• Adaptability to the marketplace. Can your company handle the special requirements of the incentive and promotional products market? Examples: having to offer multitiered pricing to middlemen and end users, using multiple distribution channels, meeting erratic and difficult-to-project volume and timing demands, having to live with big swings in order sizes and little or no discernable seasonality. If a major corporate user depends on having a large quantity of your company's products or services available at a certain time, you can't simply delay the order because of demands made by a major retail customer. Management will also have to live with the fact that a program sold this year may not result in actual redeemed sales until a year later. Tip: Determine the average order size your company is prepared to handle. The corporate market offers some high-volume prizes, but also lots of small orders flowing through numerous sources. 
• Going to market. Major companies with the most desirable products use incentive representatives to reach customers in the corporate market (see "Types of Suppliers"). Others sell primarily through promotional product distributors. Some sell direct. Most do all of the above but won't necessarily admit it. However you decide to go to market, remember that success lies in identifying the key people most likely to buy and resell your product or service and giving them meaningful benefits for doing business with you. 
• Developing the appropriate strategy. This step should precede the process of selecting specific tactics. The tactics you use will depend on your overall plan, market positioning and distribution channels. The strategy should spell out such things as reasonable goals, market opportunity, unique selling proposition, current and future market positions, projections and methods of going to market. Most of all, it must define your market positioning as specifically as possible. 
• Can you devote the necessary resources to the market? Many companies send a lone manager out into the corporate business (often called special markets) with little in the way of staff or marketing support. Others spend too much in wasteful marketing and end up abandoning the market for the wrong reasons. The incentive and promotional products market demands more in the way of management and sales and marketing savvy and expertise than it does money, but savvy and expertise sometimes are the rarest commodities of all. 
• Develop an account-based strategy. Since relatively few companies will make up a huge percentage of your organization's revenues in this marketplace, every sales and marketing effort should be entered in a continually updated database of your best prospects. Companies using account-based management get far more mileage from advertising, trade shows, and direct mail because they are able to translate the marketing into measurable sales. 
• How is your follow-up? Most companies in the corporate marketplace spend considerable sums on advertising, direct mail and trade shows and almost nothing on making sure the leads are followed up, tracked and acted upon. Lead follow-up is so tedious and seemingly unproductive that most salespeople would rather not do it at all, so you will have to consider outsourcing the process or hiring part-time salespeople to do the job. Lead follow-up not only helps you find golden opportunities amid the considerable number of poor-quality leads generated by any marketing effort, but enables you to determine your cost per customer, the best index for use in determining how to apply your marketing dollars.
  

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Sales and Marketing

Compared to most consumer markets, the incentive and promotional products businesses are relatively inexpensive to penetrate in terms of sales and marketing dollars. And new technology, such as sales automation and the Internet, are reducing costs even more. The basic sales and marketing procedures differ little from those that prove successful in any business-to-business situation. They include the following:

• Advertising. While not necessarily required, advertising offers a rapid way to get exposure in the incentive and promotional products business. It can be relatively inexpensive, since there are only two primary magazines in the marketplace. Advertisers that have a system for conscientiously following up leads will invariably see their advertising break even, and they may even come out several dollars ahead. 
• Direct mail. Because most corporate customers buy on an occasional basis, any type of response-oriented advertising yields relatively little return. There are few offers that will get a company to do an incentive program when they don't want to do it. Direct mail in this business works best when targeted at a specifically defined prospect list and fortified with useful information and added-value offers that encourage people to sample the product. 
• Trade shows. Because most of the industry's key middlemen and buyers go to The Motivation Show at McCormick Center in Chicago or to the New York Incentive, Rewards and Recognition Expo at the New York Sheraton Towers & Suties, suppliers who know how to exhibit can more than pay for their investment at these shows. They also get invaluable names of future prospects and get the critical face-to-face contact that has become increasingly difficult to get through sales calls. Critical steps for success include a pre-show marketing plan to make sure buyers know you're there, some sort of at-show visibility to direct them to your booth and a post-show program to reach buyers looking for merchandise throughout the year. Most important of all, however, is a lead follow-up program. 
• Lead follow-up. Most companies fail to follow up effectively on leads generated from advertising, direct mail and trade shows. Why? Nobody wants to do it. Most leads generated from marketing efforts are not serious prospects, and many involve tedious phone tag and calls that go nowhere. However, the benefits of effective lead follow-up warrant finding a solution: If only two leads in 10 represent viable prospects (the average return of the best marketing program), you can more than pay for your marketing investment and build a long-term, continually updated database of serious prospects. 
• Database management. If your company doesn't use a contact-management program, you are missing out on the lowest-cost way to identify and focus on the people most likely to buy. (The software can be as basic as ACT, Maximizer or Gold Mine.) By having your salespeople using their contact-management programs and uploading their databases regularly into a central location, you can significantly reduce your costs by identifying the organizations most likely to buy your products and services, then communicating systematically with them. 
• Relationship building. Many companies that manage to come up with a good database of serious prospects do little more than send out brochures or trade show invitations. Savvy marketers go a step further and send out informative newsletters or other forms of communication on a regular basis. By providing potential customers with useful information in a concise, benefits-laden format, you stand a better chance of being chosen when people are in a buying mode. 
• Long-term sales follow-up. Most suppliers leave it to salespeople to keep up with prospects.  Often, there's no consistent plan for long-term follow-up. Developing a means of consistently following up with prospects can pay off handsomely, since these are the people most likely to buy. This sort of follow-up often can be provided by the same organization charged with doing initial lead follow-up.
  

Taxes and Legal Issues

From the supplier's standpoint, the most critical legal and tax issues involve sales taxes. Generally, suppliers are required to levy sales taxes in every state in which they have a "nexus," or place of doing business. However, the definition of nexus lies in a gray zone, and many states would like to take advantage of this.

For users of incentives and promotional products, the major issues involve games of chance and products packaged with food. Federal Trade Commission regulations bar companies from running a promotion that requires consumers or the trade to pay in order to participate. That is deemed to be a lottery. An alternative entry vehicle must be offered with any sweepstakes or contest. Likewise, dealer incentive programs using elements of chance are used frequently, despite the fact that they are illegal if they require a purchase, and that never seems to attract the interest of the authorities.

Many other elements go into making sure a sweepstakes is legal, of course. The Food and Drug Administration has regulations regarding shipment of premiums in packages of food, and the use of premiums with products associated with children requires great care. There are also many state regulations involving use of premiums and incentives by gas stations and certain other industries, such as pharmaceutical, insurance, financial services, liquor and tobacco companies.

Tax law requires that merchandise with a value greater than $75 awarded to employees be reported as income to the employee, basing the tax on the fair market value of the merchandise. Such awards can generally be deducted by the company as compensation. A Form 1099 must be issued to employees for merchandise awards with a fair market value greater than $600. Business gifts of under $75 generally are deductible to the provider and nontaxable to the recipient. More specific advice is available from the Association of Incentive Marketing. The association's attorney, Ray Patt (212-725-2967), will answer a basic question at no charge.

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Potential Competitors

Other consumer product manufacturers may have "special market" departments specifically designed to handle the needs of corporate customers seeking volume orders of products for use in incentive programs, meetings and training programs, as gifts or for other company use. If they are doing the job right, they have people on staff who understand corporate incentive needs, such as drop-shipping of merchandise to recipients, wholesale prices, promotional slicks or transparencies, and the critical need to have the merchandise available when the client's program requires it.

Retail direct mail catalogs often offer gift certificate programs for the incentive business. Volume discounts generally are available through corporate sales departments, along with drop-shipping services.

The low cost of electronic point-tracking makes it possible for leading credit card companies, such as American Express, Visa and MasterCard, to work in partnership with incentive companies offering debit cards as employee and customer rewards. These programs offer a powerful target-marketing opportunity that make them highly appealing for incentive users and promises to garner significant market share in the years to come. This will not reduce overall sales of merchandise for corporate use, but will shift it into traditional retail outlets where debit cards are used.

Types of Suppliers

The type of supplier you sell through depends on the precise nature of your product or service and its position in the marketplace. Obviously, companies whose products are most suitable as premiums and recognition awards will use a strategy somewhat different from one focused mostly on promotional products. Lists of incentive representatives and other middlemen and agencies are published in SupplierFinder.com, the online directory of The Motivation Show, and the annual directories of Incentive and Potentials magazines.

Incentive representatives are sales agents for the 1,000 or so top consumer product companies that sell directly to corporate end users and agencies, usually at wholesale prices (they are compensated by commission from the manufacturers). Each representative usually handles between 30 and 50 product lines and covers a designated region of the country. There are probably between 200 and 300 incentive representatives in the U.S. Most belong to the Incentive Manufacturers Representatives Association (IMRA), which offers a free directory of representatives (see "Associations"). The relatively small number of top incentive representatives and the large number of suppliers that want their attention make it impossible for all but a few suppliers to use this channel.

Advertising specialty distributors (also known as promotional products distributors) can obtain and sell just about any type of product, from a key chain to a TV set. They act as middlemen and, depending on the added-value services they provide, mark up the wholesale prices they receive from manufacturers. Depending on the company, these services may include design, imprinting, communications and fulfillment. The number of advertising specialty distributors in the U.S. ranges from 15,000 to 20,000, and most are small companies. They handle the business of top companies with huge promotion budgets as well as the thousands of smaller corporate customers that will never spend more than $1,000 a year on merchandise. While there are thousands of advertising specialty distributors that also buy programs involving premiums, the average order size of most is below $1,000, making this a difficult market for many consumer product manufacturers to reach. Even more daunting, these distributors might sell as many as 20,000 different items, making it easier for them to be loyal to their relatively small number of customers than to the thousands of suppliers vying for their time. To find distributors, look in the Yellow Pages under "Advertising Specialties," or, for a free directory, contact Cherri Gann at Promotional Products Association International (see "Associations").

Incentive companies range from small shops offering specialized services to large, full-service agencies offering merchandise, training, communications, reporting, catalogs, gift certificates and travel. These companies resell merchandise and travel to end users as part of incentive programs and usually mark up the products they buy. A few offer their own complete merchandise programs. There are probably no more than 100 incentive companies in the U.S., and most don't do business with small users.

Promotion agencies range from boutique shops specializing in a few specific types of promotion to high-powered companies of 100 people or more offering a broad range of services. These companies often will mark up products, but sometimes they work on a cost-plus basis with their clients. There are more than 1,000 companies calling themselves promotion agencies; probably fewer than 100 have annual volume measured in the millions of dollars.

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Directories of Suppliers

• The Motivation Show Directory provides the most comprehensive directory of premium and incentive product suppliers. 
• Incentive magazine's Annual Directory covers most of the categories detailed above. Call 212-592-6263. 
• Potentials magazine's annual Buyer's Guide contains most categories listed above. Nov./Dec. issue. Call 612-333-0471 or 800-707-7749. 
• Promo magazine's separately published annual directory, SourceBook lists agencies and some incentive resources. Call 203-358-4375 or 800-254-1785. 
• The New York Incentive, Rewards & Recognition Expo and Conference Directory has many merchandise resources. Call 914-591-7600.
  

Associations

• Incentive Marketing Association (IMA). IMA's mission is to promote high standards of professionalism in the incentive field, create greater corporate awareness of incentives and help its members prosper in a changing business environment through education, training and research. Call 630-369-7780. Go to http://www.incentivemarketing.com/. 
• The Incentive Federation was formed to protect the rights of organizations to motivate customers and employees through the intelligent and ethical use of incentive programs. Comprising of the leading associations, trade shows and some of the top suppliers in the incentive field, the federation monitors Federal regulations that could affect the proper use of incentive programs and lobbies against proposals that could hinder the ability of businesses to properly use incentive programs. As part of its industry services, the Federation also conducts the only regular research on use of incentives by U.S. organizations and manages the Incentive Promotion Campaign, the industry-wide effort to promote professional use of incentives and that underwrote this Web site. For information, call 908-233-4009 or e-mail hhenry333@aol.com. 
• Association of Retail Marketing Services (ARMS) is primarily geared to companies that supply and use merchandise in retail marketing programs. It conducts research on retail marketing and has an annual trade show of retail marketing suppliers, along with a newsletter that tracks promotions and legal developments. Call 732-842-5070 or go to http://www.goarms.com/. 
• Incentive Manufacturers Representatives Association (IMRA) represents manufacturers and factory-direct salespeople in the incentive business. It also publishes a handbook invaluable to suppliers seeking to get into the premium incentive business, and it conducts an annual marketing conference. IMRA offers a free directory of incentive representatives in your region. Call 703-610-9021. Or go to http://www.imra1.org/. 
• Premium Marketing Club serves suppliers and sellers of incentive and promotional products in the Greater New York area. It holds regular luncheons and special events, often with speakers representing companies that use or sell incentives. Call 908-687-3090. 
• Promotion Industry Council (formerly the Promotion Industry Club) is designed to stimulate interaction and to increase understanding and cooperation between suppliers and buyers of promotional products and services. Members are suppliers and users in the Chicago area. It holds regular educational luncheons. Call 630-369-3772. 
• Promotional Products Association International (PPAI) serves suppliers and distributors of promotional products, many of which also handle premiums. It has a major trade show open only to promotional product distributors, as well as a magazine and research on promotional products usage. This organization is not open to membership by end users. Call 214-252-0404. Or go to http://www.ppai.org/.

 

Conferences and Trade Shows

For a list of Industry Events, go to #9510, Calendar of Industry Events.

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Seminars 

• Incentive Marketing Assocation seminars. Two annual seminars produced by IMA address the basic issues of incentives in a program designed for both suppliers and users. Speakers include representatives of suppliers, incentive companies, promotion agencies and companies that use incentives. Held in conjunction with the New York Incentive, Reward and Recognition Expo and Conference and The Motivation Show. Call 630-369-7780. 
• Motivation Show Seminars will be produced by the Association of Incentive Marketing and the Society of Incentive & Travel Executives (SITE) in conjunction with The Motivation Show in Chicago. Courses will cover such topics as how to run an incentive program, trade incentive strategies, employee incentive strategies, consumer promotions, award-winning incentive programs, gift certificates and achieving corporate objectives through incentives. Call 630-434-7779.
  

Research

Relatively little research exists in the field of premiums and incentives. Following are studies that provide useful information for those in the business:

• A Study of the Incentive Merchandise and Travel Marketplace was conducted in 1997 for the Incentive Federation under the auspices of Ralph Head & Affiliates, Ltd. Marketing and was sponsored by the Association of Incentive Marketing, Association of Retail Marketing Services, Incentive Manufacturers Association, Promotion Marketing Association, Promotional Products Association International, the SITE Foundation, Hall-Erickson Inc., and Incentive and Potentials magazines. The first national comprehensive research study in five years of the incentive field, it provides comprehensive information about the usage of various types of incentives by different industries and offers indications of the effectiveness of incentives. A second phase of the study, designed to determine users' objectives, practices, costs and results across all levels of American businesses, is now complete. The 1997 survey summary was published in the September 1997 issues of Incentive and Potentials magazines. The 1999 survey summary is featured in the August 1999 issues of Incentive and Potentials magazines. Reprints of the 1999 summary are available at a cost of $5, and the full study for $25 (plus shipping and handling). For further information, call 630-369-7780. 
• The Attractiveness and Effectiveness of Incentive Reward Options documents employee attitudes toward incentives at a leading insurance company and ranks employee preferences. Conducted by Clemson University for the Society of Incentive & Travel Executives. $20 for members, $30 for nonmembers. Call 212-575-0910. 
• The Long-Term Impact of Incentive Travel in an Insurance Organization tracks the impact of various types of incentive programs at a top insurance company over a five-year period. It suggests that sales go up during a promotion, but companies must structure the program to make sure that the quality of the sales effort does not suffer during a promotional campaign. Conducted by the Society of Incentive & Travel Executives. $20 for members, $30 for nonmembers. Call 212-575-0910. 
• The Trouble With Money shows what happened when the Goodyear Tire & Rubber Co. did a controlled experiment comparing cash and noncash incentives. Free from B. I. Performance. Call 612-844-4208. 
• Cornell/ARMS Survey of Supermarket Promotions (1994) tracks usage of supermarket promotions and how users respond. Extensive information on frequency programs, sampling. $125 from ARMS. Call 732-842-5070. 
• Baylor University Study of Noncash Awards looks at what happened in an insurance company that offered incentives to one group but not to another. $25. Call 972-242-0987.
  

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Books

In addition to the books listed below, case studies of successful incentive programs can be obtained at no charge from the Incentive Manufacturers Representatives Association (703-610-9021) and the Association of Retail Marketing Services (732-842-5070).

Incentives in Marketing & Motivation, by George Meredith and Robert P. Fried Ph.D., is a comprehensive text on the incentive marketplace. The content is illustrated and includes numerous case studies that reveal the breadth and potential of the incentive marketplace. Available through the Incentive Marketing Association, $34.95. Call Karen Renk, 630-369-7780.

Sales Promotion Essentials, by Don E. Schultz, William A. Robinson and Lisa A. Petrison, has several chapters that relate to planning premium programs. 197 pages. $17.95. NTC Business Books. Call 800-323-4900.

The Loyalty Effect, by Frederick Reichheld, does not address incentive programs specifically, but it's a landmark book on the power of employee and customer commitment. 320 pages. $24.90. Harvard Business School Press. Call 800-988-0886.

Publications

Incentive magazine, a monthly, focuses on motivation in business with an emphasis on merchandise and travel. It publishes an annual directory in March. Editorial includes stories on specific types of incentives, how-to buying guides, case studies, personal profiles and a Merchandise Incentive Strategy Guide, published in the May issue. Subscriptions available at no charge to business people who use incentives; otherwise, $55. Call 212-592-6263.

Potentials magazine focuses on merchandise incentives and promotional products along with other marketing services, including trade show exhibits, point-of-purchase displays, presentation equipment and sales aids. It publishes how-to articles and annual directories of suppliers, as well as columns on promotion marketing. 11 issues. Available free to executives who use incentives; otherwise, $24. Call 612-333-0471 for information, 800-707-7749 to subscribe.

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